Chapter 6 — Key Takeaways

The core claims

  1. Rent is fixed; the denominator is a hope. Occupancy percentage is a fraction with a signed, personally guaranteed contract on top and a forecast underneath. Bellwether's \$95,200 is 6.1% of \$1,550,000 — and 7.9% of \$1,200,000, and 9.5% of \$1,000,000, with nothing having gone wrong except optimism.

  2. Invert the ratio. Do not only ask "what percentage of sales is my rent?" Ask "what sales does this rent require?" At \$95,200, holding occupancy inside 8% requires **\$1,190,000 of revenue every year for ten years.** That is what a signature means.

  3. You are not buying traffic; you are buying traffic in your dayparts. An office district is a lunch business and a residential neighborhood is a dinner business. Evaluating a site on total traffic averages across hours you will never work.

  4. Second generation is an inventory, not a discount. The infrastructure was sized for somebody else's cooking process, permitted under an older code, and maintained to a standard you cannot see. Walk it with a mechanical contractor during due diligence. That few hundred dollars is the highest-return expenditure in this chapter.

  5. The letter of intent is where the leverage is. Every term you do not raise in the LOI arrives in the landlord's preferred form. The two contingencies worth more than the rent are the due-diligence period with right of entry and the permit-and-license contingency.

  6. Tie rent commencement to the certificate of occupancy or to opening — never to delivery of possession. One sentence. Worth tens of thousands of dollars, landing in the months when you have no revenue at all.

  7. Everything is negotiable and almost nobody negotiates. Bellwether struck percentage rent (worth \$69,200 over three years on plan), converted 3% compounding escalation into fixed steps (worth \$58,769 over the term), got full base-and-NNN abatement, a CAM cap with an audit right, a broad permitted use, and an in-building exclusive. Every one came from asking.

  8. The clauses that decide your outcome are the ones you never read — assignment (which determines whether you can ever sell), the good-guy clause (which caps a personal guarantee), relocation, continuous operation, repair-and-replacement allocation, holdover, and force majeure.

  9. An allowance is a change order you have already agreed to and not yet priced. Finish the drawings before you bid. It costs calendar, not money, and it is the single highest-leverage cost control in construction.

  10. The contingency is not optimism insurance. It is the budget line for the things you are certain will happen and cannot yet name — 10–15% of hard cost. Bellwether carries 3.4%. Say so in the plan rather than let a reader find it.

  11. Overruns do not come out of the construction budget. They come out of the restaurant's ability to operate — the equipment budget, then smallwares, then the working-capital reserve. Nobody decides to merge the contingency and the reserve; it happens one invoice at a time.

  12. The schedule is a financial document. Plan-review duration, comment cycles, long-lead equipment, utility queues, and failed inspections are all outside your control. The lease is where you buy protection against them.

The formulas

$$\text{All-in occupancy cost} = \text{square feet} \times (\text{base } \$/\text{sq ft} + \text{NNN } \$/\text{sq ft})$$

$$\text{Occupancy \%} = \frac{\text{annual occupancy cost}}{\text{annual sales}}$$

$$\text{Required revenue} = \frac{\text{annual occupancy cost}}{\text{target occupancy \%}}$$

$$\text{Natural breakpoint} = \frac{\text{annual base rent}}{\text{percentage rent rate}}$$

$$\text{Rent per cover} = \frac{\text{annual occupancy cost}}{\text{annual covers}}$$

The Bellwether numbers to remember
Premises 2,800 sq ft — 1,700 FOH / 900 BOH / 200 storage-office
Base rent \$28.00/sq ft = \$78,400/yr
NNN (estimated) \$6.00/sq ft = \$16,800/yr
All-in Year 1 \$34.00/sq ft = \$95,200/yr = \$7,933/month
Occupancy on \$1,550,000 6.1%
Term 10 years + 5 + 5
Escalation \$1.00/sq ft step every 2 years → \$840,000 of base rent over the term
Free rent 3 months, base and NNN = \$23,800
TI allowance \$75,000, paid on completion
Guaranty full, joint and several, no good-guy limitation — roughly \$1.03M of exposure
Construction line \$310,000 = \$264,000 contract sum + \$37,000 soft + **\$9,000 contingency**
Construction per sq ft \$110.71
Rent per cover \$2.63 at 36,140 covers

The benchmarks (rules of thumb — ranges, not laws)

Measure Orientation
Occupancy cost, full service 6–10% of sales; under 8% is the working target
Construction contingency 10–15% of hard cost
Net change orders, second-gen conversion commonly 8–15% of the contract sum
Retainage 5–10% of each draw, released after punch-list correction
CAM cap on controllable expenses 4–5% per year, cumulative preferred
Holdover rent 150–200% of the last month's rent
Renewal-option notice commonly 9–12 months before expiration — calendar it

Key terms

letter of intent (LOI) · base rent · triple net (NNN) · CAM · percentage rent · escalation clause · rent commencement date · exclusivity (use clause) · assignment and subletting · good-guy clause · co-tenancy · holdover · second-generation space · build-out · construction contingency · change order · substantial completion · punch list

What you should be able to do Monday morning

Take any lease or lease proposal, compute the all-in annual occupancy cost in under a minute, invert it to state the revenue that lease requires at 7% and at 8%, and name the five clauses you would mark up before signing. Then abstract the whole document onto one page, put the renewal-option notice date and the CAM reconciliation date in a calendar with a nine-month reminder, and hand a copy to whoever manages the building.